In two separate desk-top reviews, IAASA, Ireland’s accounting enforcer, has found that many companies fail to provide complete information on their acquisitions and the terms of their third party debt in their annual accounts.
The role of the Irish Auditing and Accounting Supervisory Authority (“IAASA”) is to promote standards in financial reporting. In this role it examines and enforces financial reporting by certain listed entities (“Issuers”). One method used by IAASA to identify practices and issues in Issuers’ financial reporting is by desk-top thematic review. Some recently published findings of IAASA’s reviews are outlined below.
Business Combination Disclosures
Accounting standards prescribe disclosure requirements for when an acquirer obtains control of a business’s assets, liabilities and goodwill. These standards, set out in International Financial Reporting Standard 3 (“IFRS 3“), are designed to ensure that disclosures are relevant, reliable and comparable.
IAASA recently published results of its desk-top review of disclosures on business combinations included in the 2017/18 financial reports of 31 Issuers listed on Euronext Dublin, of which 14 Issuers had engaged in acquisitions:
- 10 Issuers disclosed that the amounts recognised in their financial statements for completed business combinations had been determined provisionally;
- 6 of those 10 Issuers did not disclose:
- the assets, liabilities, equity interests or items of consideration for which the initial accounting was incomplete; or
- the reasons why the initial accounting for their business combinations were not finalised by the end of the reporting period; and
- half of the Issuers did not disclose the basis or the valuation techniques for determining contingent consideration.
As part of the review, IAASA engaged with some of the Issuers regarding the business combination disclosures, seeking directors’ explanations as to why the initial accounting for certain acquisitions had not been finalised by the end of the reporting period. It also explored with Issuers the reasons why certain information required by IFRS 3 was not disclosed and sought directors’ views on the extent with which the requirements of IFRS 3 on contingent consideration had been satisfied.
IAASA confirmed that it will continue to focus on and engage with Issuers in relation to IFRS 3 business combination disclosures and, further, that it expects boards and audit committees to access whether these disclosure requirements are satisfied.
Bank Covenant Disclosures
IAASA has also published the results of its review of Issuers’ financial statements to identify the most commonly used bank covenants and determine the type of bank covenant information that is typically disclosed. IAASA notes that terms agreed with lenders are relevant for users of financial reports, as information on bank covenants assists in the assessment of creditworthiness and liquidity risk, particularly if the entity is in a questionable financial position. By publishing the results of its review, IAASA aims to encourage debate and discussion on such disclosures.
IAASA’s desk-top review was based on the 2017/18 annual financial reports published by 27 Issuers, 22 of which had debt recognised. The results identified that:
- the different type of covenants used were: net debt to EBITDA1, EBITDA to net interest, adjusted EBIT, minimum net worth, group gearing, minimum cash balance, net debt to equity and minimum shareholders’ equity;
- 8 Issuers did not disclose a description of their covenants imposed by their lenders/debt providers;
- 2 Issuers disclosed the terms of their covenants but not the measures achieved;
- 2 Issuers disclosed the terms of one of their covenants and the measures achieved but did not provide information on the other covenants imposed; and
- 2 Issuers disclosed both the covenant terms and the actual measures achieved.
The review stated that IAASA will continue to focus on and engage with Issuers in relation to directors’ rationale for not disclosing a description of bank covenants. Further, it stated that it will engage with Issuers in relation to disclosing the penalties for breach of bank covenants and the information required by accounting standards when a breach of bank covenant has occurred.